Tuesday, February 27, 2007

You're Getting Warmer

The Story
There is an old children’s game where a person hides something and then all of the other children have to find it. The only clues given to the children looking for the item are comments made by the person who hid the item. For example, if the seekers are moving in a direction that is getting closer to the location where the object is hidden, the one who hid the item says, “You’re getting warmer.” If the seeker is moving in a direction further away from the object, the one who hid the item says, “You’re getting colder.”

When the seekers are really close the hidden object, they hear the words, “Your’re getting hot!” If they continue to get even closer, they may hear the words, “Now, you’re really hot!!…You’re boiling hot!!!” Eventually, these clues will allow someone to find where the object is hidden and the game is over.

The Analogy
Unfortunately, the annual planning process at many companies is played very similarly to the game mentioned above. It goes something like this…

First, the business units are asked to submit their strategic plans to the corporate headquarters. They are not given much guidance other than to “do the best they can.” The people at corporate then look at the numbers submitted and do not like what they see. They tell the business unit that they are not close to submitting what they need to and they must try again. The would be the equivalent to telling the business units “You are getting colder.”

So the business unit submits a revised plan. It’s still not what the corporate planners want to see, so they tell the business unit “Nice try, but not good enough. You’re getting warmer, though. Try again.”

This process repeats itself over and over again until the corporate planners tell the business unit, “You’re very hot!! You’re boiling hot!!!” At last, the business unit has found the hidden numbers that the planners had been looking for since the beginning. The game ends until next year.

Although this might make for an entertaining game, it is not a very good way to run a business.

The Principle
It shouldn’t surprise people that the process mentioned above quite often leads to strategic plans that never come to pass. After all, the business unit ended up submitting a plan that it did not believe in. The goal was not to come up with the best plan, nor the most believable plan, but with the “acceptable” plan. Second, the corporate level leadership did not provide any meaningful assistance to help the business unit to meet the plan. It was just a game.

The game fails, because it is based on three of faulty assumptions:
1. Declarations are the same as plans
2. A corporate plan is the sum of individual and unrelated business unit plans
3. All goals must be met by current units

Each of these faulty assumptions will now be elaborated upon.

Faulty Assumption #1: Declarations are the Same as Plans.
Just because somebody makes a declaration does not make it so. Putting in a plan the words “My division will move from a market share of 15% to 40% in three years” does not guarantee that this will happen. Words are nothing more than promises. If there is no reasonable plan for making the event happen, the promises are nothing more than unsubstantiated hopes.

Unless the planning process does the hard work of developing realistic goals with detailed steps of how the goals will be attained, you have nothing but the wishes of dreamers. When the corporate office is successful in forcing a business unit to raise the projections in its plan without a reason for making it so, it does not automatically make the business unit any more capable of meeting those higher projections.

Now sometimes stretch goals are good, because they can help a business unit to work harder at what they do best. However, if the goal is a stretch too far, it will force the business unit to either:

• Give up on the plan (because it sees no way to make it happen); or
• Do something in the near-term to meet the goals that compromises the long-term prospects of the division (like meeting a profit goal by cutting out all maintenance and repair expenses this year, which leads to a complete shutdown when everything breaks the following year).

Saying it is so does not make it so. The details of how to accomplish the goals are more important than the goals themselves. For without the details, there is no way of knowing how realistic the goals are or how to achieve them.

Faulty Assumption #2: A Corporate Plan is the Sum of Individual and Unrelated Business Unit Plans
There is only so much that an individual business unit can do on its own. Often times, the only way that a business unit can meet its full potential is through the synergies of working with corporate resources or by cooperating in joint ventures with other business units. When strategic plans are built independently by the business units, it is difficult to achieve these cross-unit synergies.

Transfers of competencies and the efficiencies of sharing resources between business units require cooperative planning between the units. Just adding up the individual plans for each business unit built in isolation will miss all of these benefits.

The role of a corporation is to add value to its operating business units. If the corporation does not add any value to managing the business units, then it is needless overhead. In that case, the business unit would be better off as a freestanding business, because it is not getting any additional value from belonging to the corporation. Business plans need to proactively seek out the synergies that can be gained from having the pieces of the corporation work together.

Faulty Assumption #3: All Goals Must Be Met by Current Units
In a typical top-down approach to the annual planning process, the corporation determines what its overall financial and strategic goals are. For example, the overall goal may be to grow corporate earnings by 15% per year, or to grow the market cap by 20% per year, or to grow its share of the market by 12% per year. Then, the corporation takes the goal and divides it up by business unit, telling each unit what its expected share of the whole is.

It may make the corporation feel good about having all the pieces of its goals allocated to the business units. However, this could be a false sense of security. Often times, the sum of all of what the business units can realistically do falls well short of the aggressive overall corporate goal. There is a gap between what the corporation wants and what the business units can provide. Usually, the only way to fill the gap is to do more than what the current business units are capable of doing. Filling the gap may require the development of totally new competencies or the development of additional business units.

By allocating all of the goal to the current business units, the corporation might mistakenly lull itself into believing that it does not have to develop those additional competencies or new business units. As a result, the company will suffer two disappointments. First, there will be the disappointment of the current business units not being able to fill the entire gap. Second, there will be the disappointment of not having any new competencies or new business built to fill the gap. Without these new competencies and businesses to build on, the gap will only get larger and larger in the outlying years of the plan.

It is better to realistically understand the magnitude of the gap and deal with it through planning for growth beyond the current business units than it is to hide the gap in allocations of expectations to business units that cannot be met. Hiding the gap does not make the problem go away. It only makes the process for successfully filling the gap go away.

Games are for children. Planning is for mature adults. The annual strategic planning process should not be a guessing game for business units. Instead, successful annual planning processes need to take into account the following rigorous activities:

• The business unit goals need to be realistic and accompanied by a realistic stepwise plan to get there (no wishful dreaming).
• The plans need to take into account the potential synergies between corporate and the business units as well as synergies between business units (no isolated planning).
• The plans must realistically determine what gaps cannot be delivered by the current divisions and provide a plan outside of the current business units to fill the gap.

Just playing the game of “You’re getting warmer” will not get the job done.

Final Thoughts
In the former Soviet Union, there was an old saying among the factory workers:

“We pretend to put in a full day of labor, and in return, the government pretends to pay us in real money.”

If the process is not taken seriously by corporate management, then the process will not be taken seriously by the business units. To quote an old friend of mine, “A job not worth doing, is not worth doing well.”

Make sure your annual planning process is a job worth doing well.

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